Public Finance and Retail Sales numbers are upbeat about UK economic prospects

Before we even got to the latest in the current round of UK economic data there has been something of a change in financial markets. So let us reflect this via a tweet from me as I am the only person pointing this out.

Simply extraordinary! The UK ten-year Gilt yield is a mere 1.1% and we can borrow very cheaply. A combination of this week’s £3.4 billion QE from the Bank of England and the US Fed folding last night.

I suppose it is my time in the Gilt Market which means I follow it but there has been quite a shift which is getting ignored. Let me shift to the economic implications of this of which the most obvious is that the UK government can borrow very cheaply. Even if we look at the thirty-year yield at 1.59% it is very low in historical terms and but for the fact we have seen negative yields elsewhere ( and very briefly here) I would call it ultra low. No doubt its move lower last night was influenced by the £3.4 billion of purchases by the Bank of England this week especially the £1.1 billion of our 2057 Gilt. Added to that was the way that as we expected here the US Federal Reserve folded like a deck chair last night as placed a Powell put option under the US stock market.

UK Public Finances

Another area where I have been on a lonely journey is this which I reflected on last week ahead of the Spring Statement in the UK.

 However it does provide an opportunity to make clear how much the UK public finances have improved in the last few years. This often gets ignored in the media maelstrom as the priority is more often to score a political point.

In fact the January figures had been really good but maybe a little too good to be true.

Whilst some tax may have been paid earlier this year and flattered the Income Tax self assessment season the direction of travel is and has been clear.

So let us now find out.

Borrowing (public sector net borrowing excluding public sector banks) in February 2019 was £0.2 billion, £1.0 billion less than in February 2018; this was the lowest February borrowing since 2017.

So that is hopeful as there was no reverse swing but as ever we need to take some perspective for a clearer picture.

Borrowing in the current financial year-to-date (April 2018 to February 2019) (YTD) was £23.1 billion, £18.0 billion less than in the same period last year; the lowest YTD borrowing for 17 years (April 2001 to February 2002).

We see that we have maintained the same trend as the difference between this and January is within the likely error at £500 million. Also the driving force here was as hoped a strong tax collecting season.

combined self-assessed Income Tax receipts were £18.7 billion, of which £14.7 billion was paid in January and £4.0 billion was paid in February; an increase of £1.7 billion compared with the same period in 2018…….Combined Capital Gains Tax receipts were £8.8 billion, of which £6.8 billion was paid in January and £2.0 billion was paid in February; an increase of £1.3 billion compared with the same period in 2018.

I have to confess I am a little surprised at the relative size of the capital gains take and can only think that higher asset prices have helped. Do readers have any insight on it?

This means that looked at in isolation the UK fiscal position now looks very strong and we may be approaching fiscal balance which has been 2/3  years away since about 2012! Of course it may be spent and if we widen our outlook there are plainly plenty of good causes out there such as the Universal Credit shambles and the police for starters.

The national debt position is more complex.

Debt (public sector net debt excluding public sector banks) at the end of February 2019 was £1,785.6 billion (or 82.8% of gross domestic product (GDP)); an increase of £22.7 billion (or a decrease of 1.4 percentage points of GDP) on February 2018.

As you can see the rate of rise has slowed very sharply and such that even the low rate of economic growth we have seen has exceeded it causing the debt to GDP ratio to fall. Now I was asked on here about the banks last week and replied with this.

But it misses out the banks which would add another £283 billion to this. So much less than they did but still there.

So if we put them back in then the debt to GDP ratio is more like 96% but as I then pointed out the poor design of the Bank of England Term Funding Scheme amongst other things means this happens too.

Also they impact in another way as the Bank of England adds £185 billion to the national debt mostly via help to the banks.

So if we knock that off then a more realistic ratio is perhaps 87%.

Retail Sales

These showed yet again that the UK consumer seems to have “spend,spend,spend” on the brain.

The monthly growth rate in the quantity bought in February 2019 increased by 0.4%, with a decline of 1.2% in food stores offset by growth in all other main sectors.

As an aside I have noticed more than a few articles in the media telling us that people are stockpiling food and someone posted a receipt on twitter for over £600 after doing exactly that. But if we move from the media world to the much wide real one we see this.

The monthly fall in food stores was the strongest decline since December 2016 at negative 1.5%, reversing the increase of 0.9% in January 2019, with food retailers suggesting that “getting back to normal” following the January sales had contributed to this fall.

If they stockpiled a few months ago I will only be eating tinned or frozen food at their place.

Moving to the annual picture tells us this.

Year-on-year growth in the quantity bought in February 2019 increased by 4.0%, with growth in all main sectors, while the only sub-sector to show a decline within non-food stores was household goods stores at negative 1.3%.

Those who follow my theme from January 2015 that lower inflation boosts retail sales may like to note that the figures below suggest that at 0.3% it has been at play again.

Both the amount spent and the quantity bought in the retail industry showed strong growth of 4.3% and 4.0% respectively in February 2019 when compared with a year earlier.

If we look at wage growth at over 3% we see that in terms of retail sales we are seeing substantial real wage growth if the official data is any guide.

Comment

We find that the UK economic news continues to be pretty good. There are good signs for consumption from retail sales and the strong public finances do relate to what is strong tax take.

In the current financial YTD (April 2018 to February 2019), central government received £674.9 billion in income, including £512.2 billion in taxes. This was 5% more than in the same period in 2017.

So these numbers suggest we are doing better than we would otherwise have thought and if we also factor in the real wage growth that they might continue. A little caution is required as the money supply data is weak but perhaps GDP growth could continue to bumble on at 0.3% per quarter or so. At the moment if we add in an international perspective that does not look too bad.

Meanwhile some things just cannot be avoided it would seem.

In February 2019, the UK’s GNI and VAT contribution to the European Union (EU) was £2.9 billion, £1.0 billion higher than in February 2018; the highest cash payment in any month on record (monthly records began in January 1993). This is due largely to the timing of payments made to the EU by all member states rather than a reflection of any budgetary increase.

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